FRM Part I · FRM Exam Part I · Pricing Conventions, Discounting, and Arbitrage
The 1-year discount factor is 0.9615 and the 2-year discount factor is 0.9070. What is the implied 1-year forward rate starting in one year, annually compounded (closest value)?
The implied one-year forward rate starting in one year is about 6.01%. It equals the ratio of the 1-year discount factor to the 2-year discount factor minus one, because it is the growth needed between year one and year two.
- A6.01%Correct
- B4.00%
- C5.00%
- D3.50%
Explanation
Forward rate = d(1)/d(2) - 1 = 0.9615/0.9070 - 1 = 1.0601 - 1 = 6.01%. The 4.00% option is the 1-year spot rate. The 5.00% option is roughly the 2-year spot rate and ignores the forward calculation.
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